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A Canadian Google? Feds look at disruptive tech industry

Industry Canada pondered if it is better for Canadian companies to be scooped up by big tech firms — or to become them.

Promising young Canadian technology firms that continue to grow, such as Vancouver-based social media company HootSuite, will eventually be faced with a choice: stay and grow, or be acquired by larger firms. (THE CANADIAN PRESS file photo)

OTTAWA—Is it better for Canadian firms to be scooped up by U.S. technology giants, or to try and become the next technology giants at home?

That question was at the heart of Industry Canada’s analysis of the "disruptive technology" sector in June 2014, documents obtained under access to information law show.

In a report to Industry Canada’s assistant deputy minister, analysts took a look at trends in tech firm acquisitions, both in the United States and in Canada.

The report found that large U.S. tech firms — Google, Yahoo!, Amazon, Apple, IBM and Facebook — made at least 198 acquisitions of smaller “disruptive” tech firms between 2012 and the middle of 2014.

And unsurprisingly, the firms were playing with big money.

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“The six firms examined possess about $250 billion (U.S.) in cash and investment resources potentially available for acquisitions,” the report notes. “By comparison, the entire annual GDP of the Canadian (information and communications technology) sector is less than $70 billion.”

Google particularly is “in a class of its own” in pursuing new tech startups, the report noted. Google spent $6.8 billion on research and development in 2012, a jump of 79 per cent over what the company spent in 2010 “and more than the entire Canadian ICT sector combined.”

That economic asymmetry prompted Industry Canada analysts to wonder what the federal government’s role should be, if any, in its approach to the IT sector.

“Disruptive technologies have the potential to define entirely new markets, rapidly displacing existing incumbents in the process. Many small ICT startups have used innovative technology to become global powerhouses, seemingly overnight,” the report noted.

“For policy-makers, the new breed of disruptive technologies drive important questions — for example, will artificial intelligence technologies yield new challengers to Google’s search business? And if so, what would it take to build and grow that firm here in Canada?”

The report notes that there is definitely value in a startup culture that promotes innovation, disruption and cashing out when the Americans come knocking. But most of the firms snapped up by those six tech giants — around 75 per cent — were other U.S. firms. Canada came second with just 10 out of 198 total acquisitions between 2012 and mid 2014.

“This finding can be interpreted in two ways. It can be viewed as a loss of a relatively small number of promising Canadian-controlled firms,” the report stated. “It can also be interpreted as a positive sign that Canada’s ecosystem is producing promising high tech firms worthy of acquisitions from American giants.”

Ultimately, the report concluded that while the entrepreneurial path of selling high to big companies has value, selling out to Google represents a missed opportunity for Canada’s long-term prosperity.

It pointed to “promising young Canadian technology firms” that continue to grow — social media company HootSuite, ecommerce firm Shopify and education company Desire2Learn — that will eventually be faced with a choice: stay and grow, or be acquired by larger firms.

“For policy-makers, this decision point represents a linchpin moment,” the report warned.

“Firms that choose to stay and grow may go on to create significant value and jobs in Canada. Those that choose to sell could represent a missed opportunity, potentially undermining a Canadian support ecosystem designed to foster conditions that allow a successful firm to grow from startups to large-value creators.”

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